August 5, 2019

As Risks Go, Flood Beats Fire 5 to 1

Trillions of dollars in properties and developments along the coastal U.S. are being threatened by a warming planet, according to a groundbreaking government study released in 2018. The threat is not limited to coastal properties. “Climate change is . . . increasing the frequency and intensity of heavy rainfall storms,” said Andreas Prein, a project scientist with the National Center for Atmospheric Research, in a New York Times article posted as Tropical Storm Barry approached the Gulf Coast in July. Extreme precipitation creating heavy downpours has increased in every region since the 1950s. Just this year, record flooding has washed out key infrastructure and swamped both croplands and cities.

While the facts and issues surrounding climate change continue to be debated, even those who believe global warming is a threat seem willing to build in spite of a high risk of flood. Waterfront tourist developments contribute significant revenue to state and local budgets and residential waterfront properties are considered premium properties.

Some risk management specialists suggest that in the near future developers could be held negligent for not paying attention to factors like sea-level rise in coastal areas when publicly available maps indicate that a structure could flood during the building’s lifespan. Currently, however, building codes are based on historical data and do not reflect future risks such as the impacts of climate change.  

Flood Risk Management Trends

Strategies to manage environmental threats are gaining traction. Sustainability, the effort to make the impact of the environment on communities as small as possible, receives a lot of attention. Resiliency, the effort to keep the environment from impacting buildings and communities, is often included in initial design as well as in retrofits after a disaster.

Resiliency is commonly built into facilities like hospitals where uninterrupted operations are critical. Now the concept is being applied more widely in commercial real estate, for example, developing seawalls and dikes, elevating structures, or moving mechanicals from ground floors. Some of the best practices for community flood resilience recommended by the Environmental Protection Agency include a comprehensive disaster recovery plan, green infrastructure techniques, land conservation in river corridors, restoring wetland vegetation, discouraging development in frequent flood areas, adapting flood-resistant building codes, and coordinating with neighboring jurisdictions to implement a watershed-wide approach to storm-water management.

Government Regulation and Insurance

While regulation of flood-plain building is a state-by-state issue, the Federal Emergency Management Agency (FEMA) has placed more than 20,000 communities in the U.S. into a category of flood zones. FEMA’s Flood Insurance Rate Map (FIRM) determines both the special hazard areas and the risk premium zones applicable to the community. The most hazardous flood zones are usually first-row, beach-front properties (labeled “V”) and properties near water (labeled “A”). Flood insurance is mandatory in all V and A zones. Properties in these high-risk zones are eligible for FEMA’s National Flood Insurance Program (NFIP).

Flood insurance covers direct physical losses by flood and losses resulting from flood-related erosion caused by heavy or prolonged rain, coastal storm surge, snow melt, blocked storm drainage systems, levee dam failure or other similar causes. Coverage limits for commercial property are $500,000 for the structure and another $500,000 for its contents. Homes or individual units (e.g., condominium association coverage) are covered for up to $250,000 on a replacement cost basis and the contents for up to $100,000 on an actual cash value basis. Replacement cost coverage pays to rebuild the structure as it was before the damage. Actual cash value is replacement cost minus the depreciation in value that occurs over time. Excess flood insurance is available in all risk zones from some private insurers for NFIP policyholders who want additional coverage or where the homeowner’s community does not participate in the NFIP.

The new era of billion-dollar weather events has put enormous pressure on the NFIP program. Grandfathering contributes further strain as properties are permitted to retain a pre-FIRM rate when the property zone’s premium has been increased by a more current rating. Complicating the entire picture, the FEMA maps used to determine risk are outdated and don’t take into account the accelerating risks of climate change. 

On March 18, 2019 the Trump administration announced plans to reform the NFIP with a shift to fully risk-based pricing of flood insurance. FEMA announced the program would begin to assess properties individually, using several variables such as hurricane rainfall, coastal surges and proximity to bodies of water, rather than applying a single formula for an entire flood zone. The reformed system could potentially drive more flood risk into private reinsurance and risk markets. FEMA will announce the new rates on April 1, 2020, and it will implement the new system on Oct. 1, 2020.

Private Insurance Has a Role

Property values have increased, as have the costs of repairing or replacing storm-damaged property, also affecting the amount of coverage required to fully mitigate risk. Often, insured parties are required to supplement NFIP insurance with private policies. In some cases private insurance makes more sense altogether. In February, federal regulators announced a rule requiring regulated lending institutions to accept private flood insurance policies comparable to the NFIP. The rule took effect on July 1, 2019.

Flood insurance had long been considered an untouchable risk by private insurers because they did not have a reliable way of measuring flood risk. In recent years insurers have become increasingly comfortable with using sophisticated models to underwrite insurance risk, and modeling firms are getting better at predicting flood risk.

Private insurance policies now offer excellent coverage and competitive pricing. Another plus – when multiple units require coverage, as in the case of a condominium association’s coverage, private policies often allow full coverage of all units by one policy.  

The downside – what to do if your carrier non-renews your class of coverage. Loss history may contribute to being dropped from coverage, but carriers may simply pull out of the flood market entirely. Shopping other private carriers may provide alternatives, but in many cases a return to the NFIP will be the best solution, although post-FIRM rates will now be your only option.

Surprising Facts You May Not Know

Flooding is the most common and costly natural disaster in the U.S., causing billions in economic losses each year. According to the NFIP, 90% of all natural disasters in the U.S. involve flooding.

A structure located within the 100-year floodplain has a 26% chance of experiencing flooding but only a 4% chance of experiencing a fire.

More than 25% of flood claims come from properties in the low-minimal risk zones. Just one inch of water in a structure can cost more than $25,000 in damage. A homeowner’s policy does not cover flood, but flood insurance can pay a claim even if the flood event is not declared a disaster by the President.

Most people believe the government will assist them in the event of a significant loss. Here are some facts about disaster assistance:

  • Disaster assistance comes in two forms – a U.S. Small Business Administration loan, which must be paid back with interest, or a FEMA disaster grant, which is about $5,000 on average per household.
  • The average flood insurance claim is nearly $30,000 and does not have to be repaid.
  • Disaster assistance can be provided to a property address only once – i.e., once disaster assistance is provided to a property address, it will never be available again.
  • The disaster assistance funds are only available if the damage costs reach a threshold for the President to declare it a disaster.

Bottom Line

Environmental activities can trigger many risks, including increased and different storm events, flooding and sea-level rise. Larger storm events and changes in precipitation amounts and type (rain vs. snow) can greatly affect water supplies, storm-water design and landscaping options for developers. Property owners will want to ensure that risks are properly assessed and mitigated. In the case of properties in flood-prone areas, inclusion of sustainability and resiliency in building will be your first line of defense against disaster. A well-executed insurance plan will provide a measure of insulation should damage be sustained.

Businesses whose properties are situated in areas at risk for flood and other environmentally triggered disasters will want to develop a broader plan for disaster recovery. From fires to floods, earthquakes to hurricanes, disaster can strike anytime, anywhere and often with little to no advance warning. According to the Insurance Information Institute, as many as 40% of businesses forced to suspend operations due to a natural or human-caused disaster never reopen their doors. Your flood and commercial property insurance policy would help you rebuild your physical infrastructure, but you will want to plan for lost revenue and mounting expenses while you work to restore operations.

Additional Resources

  • Ready or Not: Ensuring Your Business Is Prepared for a Disaster [webinar]
  • Is Your Company Prepared If Disaster Strikes? [article]
  • BizTips: Protecting Community Associations from Risk [video]

Your Team

Bill Stitt (BStitt@cbiz.com, 941.960.8784) is Senior Vice President of CBIZ Insurance Services and Matt Mercier (MMercier@cbiz.com, 941.586.0702) is CBIZ’s National Director of the Community Associations Practice. Together they have over 50 years of experience in insurance brokerage. Headquartered in Sarasota, FL, they are CBIZ’s go-to experts in flood risk mitigation. Don’t hesitate to call on them for additional information on this article’s focus and other property & casualty issues.

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